Often Overlooked Yet Important Items in Process Buy-Sell Agreements
Excerpted from Chapter 15 of the new book, Buy-Sell Agreements: Ticking Time Bombs or Reasonable Resolutions?
Several other issues related to valuation should appropriately be addressed in your buy-sell agreements. The following discussion is by no means exhaustive, but includes items that are helpful in minimizing problems or uncertainties with the operation of process buy-sell agreements. While some of these items may seem obvious when identified, they are quite often overlooked or are unclear in buy-sell agreements.
Financial Statements. It is enormously helpful to specify the financial statements to be used by the appraisers). In the absence of specification, the parties must agree on the financial statements to be used, or else the appraisers) must decide. Significant differences in valuation conclusions can result from the selection of financial statements of different dates and quality. This confusion should be avoided.
Possible alternatives fur specifying financial statements include:
- Most Recent Audit, or the audited financial statements for the most recent fiscal year relative to the valuation date. Note that there is room for confusion here. Assume that the fiscal year is the calendar year. Suppose that the trigger date for a valuation process is January 15, 2007. The most recent audit was issued as of December 31, 2005 on April 27, 2006. If the buy-sell agreement calls for the use of the most recent audit available on the trigger date, the financial data may be more than one year old as in this example.
The agreement might specify that if a trigger event occurs between the end of a fiscal year and the issuance of the audit for that year, the appraisers would rely on the audit when it becomes available. That audit would then be used for the rest of the fiscal year.